You won’t find it on the calendar. No
official date exists, but with Advertising Week almost complete, one
that included MediaPost’s OMMA East and the IAB’s MIXX-Expo in New York
City not to mention iMedia’s Brand Summit in Coronado Bay, California,
it’s safe to say tradeshow season has begun. For the companies that put
them on, the reasons for doing so are clear; for publishing based
companies especially, the revenues from the shows fund the less
profitable and less scalable content. For attendees the reasons for
going are less clear and the value of the shows to date, hard to
quantify. As the Internet economy continues to grow, so too will the
number of shows. These shows can be quite fun, but at some point they
take their toll both in time and money. So, how do you know if a show
was a good show? I believe the answer comes not from the traditional
approach, i.e. how many leads but from a study of underlying elements
in the value of a tradeshow. I believe there are five dimensions to the
tradeshow value formula, and we’ll discuss each in a two part tradeshow
article.

Getting to a tradeshow costs money.
Sending more than one person costs even more. Exhibitors can count on
an even larger total, and sponsors among the highest cash outlay of
any. Regardless of which group you are, the goal of those at the shows
remains the same – to get your money’s worth – which until now meant
looking for an increase in sales. While the show floors often bustle,
finding new leads among the sea of attendees does not happen as easily
or as often as one might think. A few hours of badge reading, and it’s
hard to say whether people are genuinely looking or just checking each
other out. Anyone who has worked a booth knows the prospecting
situation remains equally unfulfilling. Meeting someone who could
potentially spend money with you isn’t tough, but finding somebody you
actually want to spend money with you is another story.

As attendees or exhibitors we feel
compelled to go because we might just land a whale. It’s like a casino
really. The odds of winning enough to cover the cost of going, let
alone breaking even on your bets, aren’t in your favor. You won’t win
if you don’t go, and if you don’t win, someone else, like your
competition, might, and that is often a compelling enough reason itself
to go. With regards to the tradeshow, the odds of finding the client
you want aren’t high, but if such a client is going to be there, you
certainly don’t want your competition getting to them and not you. Take
as a given that all want the conference to generate sales, but sales
alone as an outcome often won’t justify the cost of going. Like a
casino, it makes for an emotional connection to going, but the true
payoff comes from other experiences garnered from your time at the show.

Besides new sales, a second dimension
to evaluating the shows is the quality of non-new business development
connections made – the networking and face-time. Our industry is by
definition a virtual one, but the rules of human interactions still
apply. Straightforward deals might make up the majority of booked
business, but in that remaining 20% of business that constitutes 80% of
the profits, chances are that it includes relationships that rely on
close communication. These are the exact type of relationship that are
worth enhancing during the shows. These are the ones that lead to new
introductions, advance notice of policy changes, preferential treatment
(e.g., being able to bid on an advertisers’ trademarked terms when
doing PPC arbitrage), and insights impacting both product design and
overall corporate strategy. Networking and face-time are, however,
ethereal and intangible. Rarely is there an agenda, and more often than
not you don’t know in advance what the takeaways will be. The shows
bring you together; use that time to connect with your key
relationships and peers in the space.

Networking and face-time focus on
non-agenda driven outcomes. So, too, does the third dimension of
tradeshows. It offers something that has little revenue impact but
guaranteed results. The dimension is entertainment, and the result is a
good time. Those in our space know how to throw a great party. It’s a
guilty pleasure, one that puts a hurt on the next day’s productivity,
but entertainment as much as anything starts to hit at the heart of the
underlying value of tradeshows. Chances are, each industry has its fair
share of alcohol intake, but ours seems particularly egregious, and
this most likely stems from a combination of the median age of our
industry being so young and the companies in it fostering a work hard /
play hard culture. As an attendee, I look forward to the parties,
despite the high cost of drinks, impossibly long lines, and unfavorable
female to male ratio. I thank the generosity of the companies who send
us and their tolerance of our not so subtle excesses. The entertainment
is a microcosm of the show – it hits at an emotional level; it is
something you don’t want to miss while others enjoyed. As one dimension
of the show, its value comes from the shared experience it creates, and
its adding to the common vocabulary of the show attendees. In Part Two
of our tradeshow valuation, we’ll look at the two remaining dimensions
to the formula and further illustrate their value in creating a richer,
more unifying experience.

When I set out for New York City early
this week, I had an idea that I would write about the tradeshows. In
the past, that has meant a descriptive account of the goings on, not an
attempt to ascertain the value of going in the first place. Intrigued
by the potential investments into AOL by Microsoft or even Google, and
AOL’s being seen as a battleground to control search, I intended to
cover the fight for AOL and less about the tradeshows. The more I kept
writing about the shows though, the more intrigued I became on their
value and how we as individuals can try to make the most of them. If we
can’t make the most of them, at least we can leave with a better
understanding of what they offer and what they don’t. Tradeshows are
more than just a sales channel, more than a branding exercise. As we
conclude this week’s two part Digital Thoughts, I hope to do what the
shows themselves ideally should do, provoke thought. Here, in Part Two,
we continue our examination of the elements behind the madness.

In Part One, we covered in more depth
how tradeshows provide a) an avenue for sales, b) a time for networking
/ face-time, and c) entertainment. But, they also offer something else
that tends to draw the big and small clients alike. It is our fourth
dimension to the tradeshow valuation formula, and it is education. I
have typically held a negative view of the sessions (the education
piece of the shows), thinking them a waste of time and money as success
in our space depends on being an expert in the topic before they become
session topics. Having gone to more and more shows, I’m starting to
change my opinion on the value of the sessions. I still feel that many
of the sessions focus on bringing beginners up to a level of
intermediate proficiency. That is certainly the case with the speeches
I have given. They speak towards the lowest common denominator giving
an overview rather than being an advanced working session. And that
makes sense. At the end of the day, those you want to speak are those
who know and/or have achieved success in that topic. These speakers
though aren’t looking to create their next major competitor, so they
assemble information that is publicly available and explain it in a
more practical and concise manner than self-study yields.

That the sessions and panel
discussions might not lead to immediately applicable insights
diminishes their value no longer. It’s taken a few years to finally
believe this, as historically, my ability to achieve an immediate
tactical benefit would be the benchmark for something having value.
Like the parties, the sessions build upon and enhance the vocabulary of
the common language that emerging from attending the shows. The
sessions won’t finally help you figure out how to pick keywords better
or design landing pages that outperform your current ones, but they
will help you communicate with others better by helping you understand
their frame of reference and viewpoints. Additionally, they provide a
chance to hear how some of the more accomplished minds think. Not just
what they say about a topic but how they approach the problem. The
sessions are as powerful for that as anything. Yet, only 20% of those
going to a show will opt for the full conference pass, which leaves the
final dimension of the tradeshow valuation, the visual landscape from
the exhibit hall.

The exhibit hall is many things,
including a proxy for the state of the industry and the show, not to
mention its still being the main draw for many, including those who
operate outside the mainstream of Internet advertising and/or below the
radar. We walk the floor not just for what it tells us about the
industry in general, but for what it tells us about specific vendors,
partners, suppliers, and competitors. Despite being under one roof,
those who go for the floor have a different agenda than one who attends
for the sessions. The value of the sessions will hopefully increase in
minds of the floor only attendees, but it cannot replace or replicate
the value of the vibe. And the vibe comes only from the floor. Who is
on display, how their display looks, what their literature says,
whether they displayed in previous shows and what if anything changed,
all tells us something. Together, it’s a lot of information, which is
why reading the landscape is just as important as the potential for new
clients as it can confirm our product offering and strategies or point
out areas that need to be addressed. The exhibit hall is the visual
representation of our world, and the final dimension to tradeshow
takeaways.

Going to a show for only one of the
five dimensions will most likely lead to a feeling of disappointment,
that somehow you didn’t get out of the show what you wanted. For
example, the expectation of sales alone will net some doors being open,
but in all likelihood not to a huge deal flow. Similarly, networking
and face-time are great for business, but not strong enough reasons to
attend a show. Partying is especially fun, but it leads to less work
not more, and a morale boosting good time can be had other ways.
Education won’t satisfy the needs of sophisticated marketers. Lastly,
competitive and landscape intelligence have typically been enough to
draw people in the past, but can just as easily be a let down for
smaller, unproven shows or variations of the same show.

The not discussed dimension is the
show organizers, who have a responsibility that extends beyond setting
up an exhibit hall or arranging pertinent sessions. The entire industry
benefits when the people who make it work come together and
participate. Those who put it on should recognize the multi-dimensional
nature of the event and make sure their actions only encourage this
interaction to increase their tradeshow valuation. Each show will vary;
so long as some combination of the multiple dimensions exist, that is
what matters. The best shows will do what movies do. They will take you
away from the day to day, focus you on areas that you wouldn’t
normally, and provide you and everyone else there an ability to
converse on the industry and each others’ businesses.

It’s hard to say when it happened, but
it did. Our industry, once the unwanted offspring of the media world,
operates in obscurity no longer; investors and members of the “real”
world look upon it and those of us in the trenches with admiration. We
now receive more attention and praise than we know how to handle. We
have survived spam, adware, click fraud, and even ourselves to face, no
longer questions surrounding our industry’s legitimacy but, a deal flow
comparable to no other period. Last week’s newsletter covered why the
companies behind the deal flow might last. Past issues have also looked
at several of the bigger acquisitions in depth. Today, in a special two
part Trends Report, we’re using a wide brush and painting a picture of
the past year and the billions of dollars pumped into our space through
some of the lesser and better known purchases and investments. When
these acts of outside validation started to occur is hard to say, but
right before and ever since the multi-billion dollar Google IPO, the
deal flow that started out a trickle is now wide open.

ValueClick, after an almost two year
hiatus, stepped back into the game with their purchase last Fall of
PriceRunner, the comparison shopping engine with a dominant position in
Sweden and a leading positions in the UK. The amount was $30 million, a
significant number but one that was sufficiently trumped when United
Online put Internet companies back on the map with its acquisition of
Classmates.com. The low-cost ISP agreed to pay $100 million for the
paid subscription service that at the time of sale had 38 million
registered users and 10.3 million paying ones. United picked up a
sizeable database of people paying money and some serious media
expertise with Classmates, although the social networking craze and
other acquisitions has kept the spotlight off of both companies for the
past year.

Not long after United Online picked up
Classmates in October 2004, a deal that showed the old guard still had
an interest in the online space took place. Dow Jones & Co.,
publishers of the Wall Street Journal and WSJ Online among other things
decided to purchase MarketWatch from CBS for the rather astronomical
sum of $538 million, or $463 million net of cash. It was a move that
the Dow Jones reported would help reduce their “reliance over time on
B2B financial and technology advertising.” The deal netted the
purchaser seven million monthly uniques and an audience that certainly
complimented its well-known WSJ brand. Not to be outdone, WSJ
competitor The New York Times stepped into the acquisition arena when
it agreed to purchase About.com for more than $400 million in cash, or
roughly 10 times earnings. The transaction, which took place about four
months after the MartketWatch announcement, gave the parent of the
NYTimes.com an additional 22 million unique viewers and a company whose
network of individually run sites can be considered a precursor to
blogging. If it wasn’t, the About.com deal at the very least put
content back on the map.

Regarding content, MarketWatch and
About.com weren’t the only ones to cash in on a content driven user
base craze. Three other high profile content sites, totaling more than
$1.3 billion in combined sale prices took place not only this year but
within the past five months. The first of the three major content
acquisitions, Neopets, had a user base larger than About.com’s but one
that skewed heavily towards the SpongeBob Squarepants demographic. For
direct marketers, that made for a pretty unattractive audience, but for
MTV whose parent company owns the rights to not just SpongeBob but also
RugRats and other Nickelodeon properties, Neopets made for a logical
extension to its youth brand portfolio.

While Neopets went from 90,000 users
to almost 30 times that amount within five years, it remained, as
Jupiter Analyst and parent of an avid user, Joe Wilcox pointed out,
still somewhat “cobbled together.” Neopets looks and interacts like
none of the other corporate properties owned by MTV Networks and its
parent company Viacom. That unpolished and engaging charm seems to
have, if not helped, certainly not hindered its growth. It will be
worth watching to see whether that changes once the “suits” take over
and what impact turning Neopets into an over the top corporate flash
site might have on the audience. It’s a scenario that could also play
itself out for another of the major content / user base acquisitions.
Neopets, which fetched (no pun intended) $160 million, was out done
when another of the major media companies, in this case Rupert
Murdoch’s News Corp, purchased the Neopets equivalent for the teen and
young adult audience. Mr. Murdoch’s Fox Interactive Marketing picked up
Intermix, the parent to MySpace.com, for $580 million in July of 2005.
It’s an amazing story, and one almost everybody with access to a
computer has heard about. For those who might not have read the
Intermix/MySpace.com saga, it’s worth reading.

Deciding that one youth oriented site
wasn’t enough, Rupert Murdoch outdid himself less than two months after
plunking down $580 million for Intermix/MySpace.com. Two weeks into
September and three weeks after our feature article on gaming network
IGN and News Corp’s rumored interest in them, the $650 million purchase
became official. Technically, though, the purchase of the largest
aggregator of young males online was not the second of News Corp’s
purchases, but the third. A month earlier in August, the company behind
Fox Sports picked up Scout.com, whose parent company also is the
largest publisher of team specific offline publications. Scout’s loyal
and sizable audience company will compliment and bolster not just Fox
Sports but IGN as well. Mr. Murdoch’s desire to spend more than $2
billion this year in online acquisitions only underscores the frenzy
surrounding our space. It’s a frenzy we pick up in Part Two of Trends
Report where we highlight other major investments and predict
consolidations. Join us for the conclusion.

Part One of Trends Report recapped six
major investments, including five content driven sites totaling more
than $2 billion in transaction prices. Four of those deals occurred in
a span of less than four months. Yet, as impressive as that number
sounds, it’s only the tip of the iceberg, one that contains industry
stalwart DoubleClick taken private in a $670 million deal, Adobe buying
Macromedia in a $3.4 billion stock deal, and the purchases of
Slate.com, Snapfish, Flickr, Atomz, Bloglines, not to mention
investments into news aggregator Topix.net, and uber-listings site
Craigslist. And these are the ones that we won’t be covering this time
around. With so much left to cover, we will not have time to explore
Google’s being ahead of the curve yet again as they were with Pyra
Labs’ Blogger purchase in 2003 and now with their recent mobile focused
acquisitions of Dodgeball and Android. No, for the conclusion of
Following the Money, we’ll keep the purchases closer to home, starting
with Ask.com.

On the first day of spring, before MTV Networks’ purchased Neopets,
Barry Diller’s IAC, the company behind fan-favorite but financial dud
Citysearch.com, as well as leading online dating site Match.com and
monopolistic Ticketmaster.com, purchased Ask.com for $1.85 billion. Ask
joins a suite of sweet offline and online brands including
Entertainment, Home Shopping Network, and the newly spun Expedia.com.
Having acquired the Integrated Web Holdings 14 months earlier for a
mere $300 million, Ask saw a healthy return on that investment, one
that boosted the company’s earnings by double. Not bad for a butler
with a diverse product offering and yet only a single digit share of
the search market.

Two of Ask’s major advertisers, Shopping.com and Shopzilla, also
benefited from the capital markets and others’ interests in online
advertising. Comparison shopping sites have long held the interest of
investors, and ValueClick, as mentioned in Part One helped set the
stage with their acquisition of Pricerunner. On June 1st of this year,
eBay announced its intention to acquire Shopping.com for $620 million.
Analysts saw it as a means for eBay to inject growth into its sluggish
first quarter results and as a step towards taking on Google and Yahoo
for commercial search. In addition to Shopping.com, Shopzilla saw its
fortunes improved when offline giant Scripps, the company behind HGTV
and the Food Network, decided to purchase the company formerly known as
BizRate.com. That deal netted the shareholders a price close to their
larger rival, one around $525 million. Both companies earn more than
$130 million annually and are believed to have margins around 30%.

eBay, like News Corp’s Fox Interactive, didn’t settle for only one
major investment. Ten days ago, they surprised just about everyone when
they decided to purchase internet chat provider Skype, founded by a
pair of one-time notorious P2P pioneers, for more than $2 billion. With
their acquisitions this year of Webclients.net, E-babylon, and
Fastclick, ValueClick illustrates two of three acquisition trends –
consolidation and multiple acquisitions. The company paid $141 million
for Web Clients, $15 million for E-babylon, and approximately $200
million for Fastclick. As for the three significant acquisition trends
we reference, they are, 1) offline media / content companies making
large plays online, 2) consolidation in some of the major traffic and
marketing verticals; and, 3) companies making multiple online
acquisitions.

Webclients.net/ValueClick wasn’t the only ad aggregator receiving
attention. This year also saw the funding into direct response leader
Azoogle Ads, who in February received $48 million. LinkShare, the last
of the established, independent affiliate networks agreed to a $425
million purchase by Rakuten of Japan. Affiliate Fuel, based in Southern
California whose model fits in between Azoogle’s and LinkShare’s was
also a beneficiary of Boom 2.0. They sold to data giant Experian who
picked up ClassesUSA shortly thereafter to bolster their budding online
education business. Experian, also falls into the third group of
companies as one that has made multiple purchases. They surprised
everyone and yet remained under the radar after they scooped up
LowerMyBills.com, one of the internet’s most prolific advertisers, for
approximately $380 million. Its purchases give Experian a competitive
advantage in two of the largest and most established lead generation
verticals.

Smaller companies too jumped on the acquisition bandwagon, including
Traffix with its purchase of PPC arbitrage specialists Hot Rocket
Marketing, and lead generation company Reply receiving $15 million in
early stage funding. Even Claria almost got in on the action; they
couldn’t quite come to terms with Microsoft who offered in the
neighborhood of $500 million. That’s OK though, as the money and
interest in our space has yet to abate. These articles alone have
mentioned almost $9 billion in acquisitions and Google only supported
that belief by raising $4 billion more. The big question on many
people’s minds is who is next? Looking back on what people have bought,
certain companies come to mind. I might look prescient in suggesting
that little known but highly profitable LeadClick will be next.
Regardless if they do, their area of expertise, lead generation, is one
area that still can shrink through growth.

The lead generation space has ,as mentioned, seen many successful
companies such as LowerMyBills.com. Quinstreet and NexTag, a company
that does more business in mortgage than comparison shopping, are both
potential targets if they would accept a price in the $500 million to
$700 million range. Chances are that ad networks and affiliate network
purchases have cooled off, although investment into them probably
won’t. The big spenders do not understand the arbitrage game as well as
content driven user bases. International expansion by both those
looking to enter the US market and US companies looking abroad for
growth should also remain strong. Direct navigation acquisition,
activity initiated by the under the radar Marchex shows signs of
maintaining its momentum. Finally, the leaders in new markets will
continue to benefit such as the two mobile sites purchased by Google.
This includes user driven sites like Flickr and MySpace. All of who
have made and should continue to make, barring any more disasters, the
remainder of this year and next some of the best we’ve seen.

Chances are the company is looking to take advantage of the increased interest in lead generation, an area largely ignored with respect to capital events. For example, Reply, a lead generation company announced a VC round of I believe $15 million. And, let's not forget the purchases made by Experian of LowerMyBills and ClassesUSA.

LeadClick would be attractive for its revenues, which have grown steadily and their margins which are far ahead of most other lead generation companies. Questions regarding certain practices do exist - inventory, lead quality, daisy chaining - so chances are the company will sell for a price lower than its numbers might suggest to avoid any potential suitor getting too curious.

Twenty-three months ago ValueClick made a move that consolidated the affiliate marketing space by picking up Commission Junction. The deal, worth approximately $58 million, left many people wondering why ValueClick would choose to purchase another affiliate platform after already having bought BeFree 16 months prior to that for $128 million in stock. Last week, during the height of the news surrounding the nation’s mishandling of Hurricane Katrina, the last of the major affiliate platforms was taken off the market. The cyclically acquisitive ValueClick did not play a role; instead, one of Japan’s major internet players, Rakuten, decided to fork over $425 million in cash for LinkShare. The Japanese’s history of overpaying certainly benefited those at LinkShare, leaving the rest in the industry to wonder whether they command a valuation almost eight times that of Commission Junction’s.

Rakuten has experienced rapid growth in its Japanese Internet business. Yahoo Japan purchased the last of the Japanese grown affiliate networks, which might explain why Rakuten went to the US for the purchase. It’s also possible that Rakuten picked LinkShare due to the affiliate marketing company’s origins. I’d hypothesize that the funding of Linkshare by one of Japan’s largest conglomerates, Mitsui, played a role in why Rakuten decided to purchase the affiliate marketer. Unfortunately, not enough information exists, in English anyway, to piece together a story of Rakuten buying LinkShare to help Mitsui realizes a return on its almost ten year-old investment. So, instead of focusing on one company’s potential exit, we turn our attention to another company’s entrance. It was the news that had all of us, that have yet to be acquired or funded, redoing our valuations, that of how Skype turned $60 million in projected revenue into a sale of $2.6 billion plus upside.

Luxembourg-based Skype makes software that allows Internet users to make free phone calls to one another. Their exponential growth gained the interest of many technology companies, including at one point Google, Microsoft, and Yahoo but saw its potential suitors pass on the desired multi-billion dollar price tag. This is why it’s hard to say whether the bigger surprise is not that Skype actually got its multi-billion dollar price tag or that eBay, a very unlikely suitor, was the one that decided to purchase the chat company. The Wall Street Journal initially saw eBay’s decision as an admission that its core business was maturing, taking the acquisition as a sign of eBay’s desire to enter new markets. An article published the next day by the Journal lead with the seemingly contradictory headline of how Skype isn’t “worth that much to eBay.” And, at close to $3 billion, it’s hard to think that eBay couldn’t replicate the technology and distribution for less.

The numbers by themselves might help explain the appeal but not necessarily the value. 160 plus million people have downloaded the software; 52 million use it, and 2 million pay for a premium service that frees up the other callers from having to have the software. Premium members can be reached by anyone with a regular phone. Have a laptop and a connection, and your friends and family can reach you by dialing a local number even when you are abroad. The most common hypothesis has eBay purchasing Skype the aforementioned user base and the technology connecting them. Certainly, some aspect of each must be true, but seeing how eBay has more than 150 million members, it seems hard to believe that a sizeable percentage of Skype’s users have not tried the auction company. Given that Skype skews largely international, there is a slight chance Skype users represent an avenue of growth. But, given that eBay paid $40 per free user and $1000 per paying Skype member (more than three times the value of a wireless customer), the subscriber count alone does not seem to justify the purchase price.

Regarding the technology, it’s been widely mentioned that eBay would most likely leverage Skype’s network to implement click to call functionality. As was the case with their $1 billion purchase of Pay Pal, eBay has shown a real interest in any company that increases the ease with which transactions occur on their site. And, it’s very likely that thanks to their owning PayPal, eBay had an inside track on the real worth of Skype. As it turns out, a majority of the premium members have a preferred means for purchasing the service, and it is, as you might now have guessed, PayPal. So, while eBay most likely overpaid, they probably did so deliberately and with reason. While I cannot imagine clicking to call in order to buy a pair of concert tickets, eBay has over the years attracted more and more high-ticket items along with merchants running stores on eBay. This audience has traditionally relied on voice for sales, and Skype will help them connect with an audience keen on learning more before buying. Additionally, transaction technology should help quell the discontent that has risen from this important group in recent times.

Ultimately, eBay needs to grow, and that can come from increasing its efficiencies, expanding into new markets – as it did with Rent.com – or both. More importantly, though, eBay needs to prepare for the future, and one way or another that future means Google. A job posting on Google indicated their intent to enter the eWallet arena, and their other assets position themselves well towards facilitating not just search but transactions. Take Google’s new Talk program for example. As the name subtly implies, Google values the VOIP opportunity more than the messaging component, even though the interface has easy to use instant messaging built in. eBay might morph its newest assets to create a local yellow pages or simply to help it move designer clothes. Regardless, eBay now has something only a handful of companies have – a presence in the medium that has rapidly proven to be an area for both growth and retention, chat. If the browser is the Internet equivalent to the TV, the chat program is the phone. EBay might not know exactly what it will do with its phone, but it did recognize the role that this type of phone will play in the future of Internet success.

When they opened their doors in 1997,
Amazon made $147,000. By the end of 1998, they earned $600,000 rising
to $1.6 billion by 1999. At the end of 2000, Amazon generated $2.7
billion in revenues. During the boom years, Amazon managed to go from
nothing to a company grossing several billion dollars in revenue. While
they often seem to be the epitome of the dot-com boom, another company
helped launch almost five years of rapid investment. This company was
not the Pets.com sock puppet; that was 1999. Nor was it Yahoo in 1996.
The company that set our lives in motion was Netscape, whose tenth
anniversary of its IPO passed almost one month ago today. Their browser
made the web, as we know it today, possible and was the lens by which
all of humanity could view it. And, with a stock touch $75 on its first
day of trading, the world showed it wanted to own a piece of the
future.

Yet, upon its release some of the
smartest minds felt the web and by extension the browser stood no
chance of becoming a part of mainstream life. An article in Wired on
this topic notes how one television executive proclaimed the Internet
the CB radio of the 90’s. And these execs had a legitimate reason to
believe that. TV offers no opportunity for interactivity and revolves
around a paradigm at complete odds with the potential of the web.
Rather than having to schedule ones time around the distribution of
content, the web allows users to determine the importance of content.
They could not only view it when they pleased but could also create it.
Those in TV could not grasp a concept where their content did not
dictate the behavior of the users. Netscape’s browser became the new
television with search becoming the remote for the now millions of
online channels.

Netscape and its IPO, shook the world,
impacting, perhaps at some level intentionally, those with the capital
as much as anyone. Unlike other forms of media, no one owned the web.
The media conglomerates that dictated how users consumed information
could not do so here, and the capital markets wasted little time
placing bets as to who would rule the Internet. During the five-year
boom, the investments were pure speculation. We would like to think
that those investing would have not fueled the hype, choosing instead
to apply sound business logic that dictated their other investments,
but money follows money. The speculators wanted their piece.

In some cases though, what seemed like
bad investments were in actuality investments made too early. Webvan,
which couldn’t survive on one billion in funding, might have stood a
chance today as evidenced by the success of urban fetch. Media
consumption and integration simply hadn’t reached that critical mass,
but there was no way of knowing it back then. The potential had been
exposed, but the promise had yet to be fulfilled. The only real mistake
it seems of the first boom was using the public markets to fund the
speculation. IPO’s should have occurred only to help scale proven
models, much like Google’s did. Instead, institutions took advantage of
the times and used IPO’s as a venture fund, transferring the risk away
from the company’s investors and onto the general public.

This time around, thankfully the
public isn’t footing the bill. They still are exposed – more on that
later – but from an investment perspective, the mine owners are not the
venture capitalists but the private equity folks. It might seem like a
technicality, but it’s an important one. Venture capitalists by
definition seek out unproven ideas whereas those in private equity want
a stake in something that has evolved beyond concept. Both, however,
represent investments in risk. Many venture companies will not see
their bets proven just as many private placement investments will not
see an exit event. That they choose to invest in our space is part
“fashion,” money following money but with a large part based on logic.
The first time around, the investment focused on Internet businesses;
this time, they have focused primarily on those who have not simply an
idea but have proven how to earn money with models that often apply
principles seen in the offline world.

Another interesting twist to this
cycle’s boom is the amount of Internet companies that have chosen to
invest in other Internet companies. Were it only the outside world that
was putting money into our space, it would be serious cause for
concern. In my opinion, the only cause for concern this time around is
the prices. No longer a pure land grab, the Internet is now a
reflection of the housing market. Prices are artificially high. It’s
not that the investments are bad choices; they are simply overvalued.
In rare instances the prices will hold and eventually appreciate. The
rest will see their value depreciate, but over time rise and ultimately
eclipse the initial price. This is what I expect we will see with the
current wave of Internet companies. A few will go under because either
they, or those that invested in them, leveraged themselves too thin;
or, like the general public, they are too exposed to slight
fluctuations from having already leveraged themselves that a large
group will struggle when prices fall. Compared to the first boom, many
more companies and individuals will survive this time around because
the actual investment had value to begin with. It certainly doesn’t
help one’s confidence, though, that the biggest deal of the past
several years just happened to rhyme with hype.

This week saw one of the more
unexpected and larger transactions of the year. After two week’s of
little news on the acquisition front, one of Japan’s largest internet
firms, Rakuten, announced its intent to purchase affiliate network
pioneer and last of the large, independent affiliate platforms,
LinkShare for the rather unexpected sum of $425 million in cash. With
ten years online operating experience, patented technology, and an
impressive client list, LinkShare makes an attractive candidate for the
publicly traded Rakuten, interested in creating a US footprint. The
price paid represents an impressive nine-fold increase compared to the
price ValueClick paid for Commission Junction in September 2003. Yet,
as exciting as this purchase and its implications are, talking about it
will have to wait until at least next week. There is a bigger story,
and there should be no surprise when you find out, that story is
Katrina.

A little more than ten day have passed
since Hurricane Katrina made landfall in the Southern United States,
laying waste to parts of Mississippi and Louisiana, including, and most
notably, New Orleans. Like New Orleans itself, the story of Katrina is
rich and complex. With more than 10,000 predicted dead, Katrina stands
to be among the costliest and certainly most deadly tragedies to occur
in the United States in recent history. Unlike the 9-11 tragedy of
fours years past, this disaster was expected – not just in the days
before the storm hit but for the past 105 years, a year that saw 8000
die when a hurricane or similar force destroyed the once bustling city
of Galveston Texas. Yet, for all our experience with disasters,
including the similar but more powerful Asian tsunami, it took almost
five days before those that could bring aid seemed mobilized. Five days
of torture and torment before we figured out what was going on. In this
week’s Digital Thought Part One we explore the factors that set the
stage as well as summarize the mass of information about the event
itself.

For many reasons, most of which are
geographic, New Orleans makes a poor choice to build a major city. 70%
of the city lies below sea level, and unlike Death Valley, California,
which also lies below sea level; New Orleans sits not just near water
but is surrounded by it including two major lakes – Pontchartrain and
Borgne, the Gulf of Mexico, the Mississippi River, and industrial
canals. Were it not for a complex levy system managing the flow of the
water, the city would have been under water a long time ago. In other
words, the city always knew of its vulnerability. That was certainly my
assumption, and thirty seconds of research unearthed an article
supporting that belief. Written less than a year ago the title says it
all “Direct hurricane hit could drown city of New Orleans, experts
say.” Hurricane Ivan, part of last years record Hurricane season helped
set the stage for Katrina’s destruction by wiping away the protection
of Breton and the Chandler islands south of the city. The natural
counterpart to the levies, the city’s other natural barrier, its
wetlands, which for so long have absorbed much of the storm surge of
approaching hurricanes, too, weren’t sustained and have been
disappearing at a rate of 28,000 acres per year.

The US and the 1.3 million people in
and around New Orleans dodged a bullet in 1998 when Georges, a Category
2 hurricane, made a last minute route change towards the coastal town
of Biloxi, Mississippi instead of New Orleans. It left 230,000 without
power but fortunately led to no deaths. Hurricane Georges came close
enough that it pushed the Mississippi River to within one foot of the
top of the levees. The last hurricane to hit New Orleans directly was,
like Georges, also a Category 2, Hurricane Betsy. That storm killed
more than 70 people and its storm surge overflowed the levees, flooding
the streets with water to the tops of many buildings. It’s just the
event that should have lead to better levies. It did, but funding cuts
by the Bush administration never saw the levies completely updated. Ten
feet were added, but that only prepped the city to handle a Category 3
hurricane. Katrina made landfall as a Category 4. Weather forecasters
thought it might even hit as a Category 5.

Katrina hit in the early hours of
Monday, August 29. On Sunday, the day prior, New Orleans mayor Ray
Nagin declared a state of emergency and ordered a mandatory evacuation
of the city, describing the arriving storm as a threat unlike any they
have ever faced before. Those that could leave did, but far too many
stayed, either unable to afford the journey or like so many, unable to
believe the storm would cause such destruction. One in six people do
not own a car, making it that much more difficult for a complete, let
alone quick, evacuation. Many could understand the damage high winds
would do to the buildings, but few understood what those same winds
meant for the water surrounding the city. And it’s the rising waters
brought in by the rain and wind that posed the real threat. Forecasters
predicted that the storm surge, as it is called, could reach 28 feet.
Yet, the highest levees around New Orleans stood only 18 feet high.

Only six or so hurricanes of equal or
greater strength have hit the United States since records were kept,
the costliest Andrew which Katrina will beat by almost ten fold, and
the deadliest, the 1900 storm that destroyed Galveston – a city that
never recovered its wealth and glory. The surge has left as much as 20
feet of chemical-laden, snake-infested water trapped in the man-made
bowl, exactly what was predicted a year ago. Those unable or unwilling
to leave and not trapped in the industrial waste have had few options.
The Superdome and Convention Center stood above sea level but were ill
prepared for the volume of people. At the end of the day, everybody
knew, but nobody really believed, a storm like Katrina would happen,
not in their lifetime. Every few years though, something that everybody
knew but nobody expected in their lifetime does happen, and we must do
our best to clean it up. In Part Two of this week’s Digital Thoughts,
we look at the cleanup and examine ways in which technology if properly
applied might help such disasters in the future